This week was pretty busy because of new elements:
- Mr. Trump has picked Mr. Powell as next Fed chairman. The markets have not moved much on the news which was rather well anticipated. The monetary policy should not be much different from what it has been previously, since Mr Powell shares Ms Yellen’s philosophy. However we must note that he is a lawyer by training and not an economist as usual. We can therefore expect that he will be more active on the financial institutions’ regulation. Thus, potential market impact is more on US banks equity prices.
- US employment report was rather weak (average weekly earnings +2.4% yoy versus +2.7% expected) and US ISM non-manufacturing reached 60.1 (highest point since 2005)
- Eurozone core inflation flash estimate was way below market expectations at +0.9% versus +1.1% yoy. We will scrutinize official data since consequences on ECB policy can be very large
- FOMC has almost endorsed December hike. The markets clearly received the message and are pricing this hike’s probability at 92%. However the dollar is not rising versus euro this week and we have therefore decided to take profit on our tactical long (USD vs EUR)
- Bank of England “Super Thursday” with inflation report and monetary policy decision. The committee vote was 7 against 2 in favor of a 25bps hike to 0.5%. However, Mr. Carney’s speech was not particularly hawkish and the pound dropped. The markets anticipate few hikes (2 over the next 3 years) and we think this prudence is justified by Brexit, weak growth and a restrictive public spending policy
The markets have reacted with a decrease in bond yields (-6bps for US 10 years note and -7bps for British 10 years gilts). The euro peripheral area performed well too, with -16bps for Italy 10 years.
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